(Yicai) Aug. 7 — China will resume collecting value-added tax on interest income from newly issued bonds starting tomorrow, ending a decades-long exemption. The move is expected to shift investor interest toward older treasury bonds, equities, mutual funds, and Hong Kong-listed debt, according to analysts.
A recent notice from the finance ministry said VAT will be levied on interest from new central and local government bonds, as well as financial institution bonds. However, notes issued before the policy change will remain exempt. The exemption has been in place since the 1990s.
Investment institutions anticipate the policy will benefit credit bonds and certificates of deposit. Mainland-based investors may increasingly use the Southbound Bond Connect to buy bonds in Hong Kong, which are unaffected by the new tax rules.
An interest rate analyst at BNP Paribas wrote in a report that some banks are likely to shift capital toward mutual fund products, which remain exempt from both VAT and income tax. The report added that policymakers may be using the tax change to encourage flows into stocks and credit bonds.
Wang Qiangsong, head of research at Nanyin Wealth Management, estimated the interest rate gap between new and existing bonds will range from five to 10 basis points. In the short term, investors are expected to rush to buy older bonds, pushing down their yields slightly.
Over time, however, new bonds are likely to gain traction thanks to stronger upward momentum and more pricing power. Wang expects small yield curve adjustments of up to five basis points.
A bond trader at a mutual fund firm told Yicai that to stay competitive with tax-exempt older bonds, newly issued 10-year treasury bonds may need to offer yields six to eight basis points higher.
Liu Xin, chief fixed-income investment officer at BlackRock Fund, told Yicai the tax resumption will prompt investors to compare pricing more carefully across yuan-denominated bonds.
Still, Liu noted that predictable and sustainable tax administration will help lower policy risk and support the internationalization of yuan-denominated assets. While the change is unlikely to alter the overall direction of the bond market, it favors existing bonds in the near term, he added.
BNP Paribas also noted the policy will help boost fiscal revenue. With stable fiscal quotas and bond issuance, VAT collection is expected to bring in about CNY4 billion (USD557.3 million) this year, rising to CNY25 billion (USD3.5 billion) in 2026.
Editor: Emmi Laine